With more and more people turning to multiple sources of income to make a living, staying on top of your taxes is crucially important. At MoneyMagpie we’ve put together a guide with what you need to know about second jobs and side hustle taxes, and who needs to file a Self Assessment.
- What Are Sole Traders?
- Side Hustle Taxes
- Second Jobs and Tax
- What Is a Self Assessment?
- Do I Need to Declare Benefits on a Tax Return?
- Payments on Account
- More Useful Reading
A sole trader is someone who is self-employed, runs their own business, and is entitled to keep all the profits once tax has been paid, but is also liable for all losses and debts of the business. As soon as you start working for yourself, you’re classified as a sole trader, meaning you’re self-employed, even if you haven’t told HMRC yet.
Self-employed people choose between sole trader or Limited Company status for their business. Sole traders tend to be solo freelancers or contractors, while anyone planning growth to employ others must register as a Ltd company. A sole trader (also called a freelancer or contractor) can employ other people but usually chooses to operate as a Limited Company if this is the case.
You can be employed and self-employed at the same time, too. There aren’t limitations on the amount of work you do, or how much you can earn, as long as you make sure you’re reporting your income correctly and are paying the correct tax, you’re pretty much fine.
You need to set up as a sole trader if any of the following apply to you:
- Earned more than £1,000 from self-employment in one tax year
- You have proof of self-employment (such as invoices)
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
Set Up as a Sole Trader
To set up as a sole trader you need let HMRC know that you pay tax through a Self Assessment by registering to do so here.
You’ll need to:
- Keep records of your business sales, invoices, and expenses.
- Submit a Self Assessment tax return at the end of every tax year.
- Pay Income Tax and Class 2 and Class 4 National Insurance Contributions.
- You must also register for VAT if your turnover is over £85,000. Even if it’s not you can also register voluntarily if it suits your business.
Side hustles and freelancing on the side are increasingly a popular way for people to earn an additional income outside of their main working hours. However, navigating the tax side of extra work can be trickier. Unlike any PAYE employment, income earned from a side hustle is untaxed, and needs to be reported to HMRC. Failing to do so can result in fines and interest on late payments.
With so many people on furlough or on reduced hours working schemes right now, side earners are an attractive option. However, it’s really important that you still register as a sole trader even if you’re currently on furlough or otherwise employed. HMRC will take into account the earnings on both jobs to make sure you’re paying the right amount of tax.
Everyone is allowed a £1,000 allowance of additional income before they need to report it to HMRC. Once you earn over a £1,000 in the tax year (6th April – 5th April) then you’ll need to submit a tax return. The amount of tax and National Insurance contributions that you will then owe will depend on how much you earn as a freelancer, and how much you are paid in your full-time job. If your additional source of income pushes your total earnings into the higher tax rate band, then you will have to pay the higher tax rate on those earnings.
Example for the 2020/21 tax year
- Miss. X earns £40,000 working for an employer, and has earned £14,000 in profits as sole trader, totalling her annual income at £54,000.
- Her personal allowance is £12,500, leaving her total taxable income at £41,500.
- Miss. X will pay 20% on her taxable income (up to £50,000), which is £37,500, meaning she’ll pay £7,500 in tax.
- As Miss. X’s earnings take her into the higher rate band, she’ll have to pay 40% on £4,000, which is £1,600.
- In total, Miss. X will need to pay £9,100 in tax for the year.
Most people take on a second job to earn some extra money, or to take the first steps to running their own business or becoming self-employed. However, you need to be careful about working multiple jobs and be aware of how it will implicate you and the tax you pay.
Everyone is entitled to earn a certain amount every year without having to pay tax, known as your personal allowance. This is currently £12,500 in the 2020/21 tax year. If you work two jobs, and neither income is above £12,500, then you can split your personal allowance between them. For example, if you earn £9,000 in your first job, and £6,000 in your second, you can ask HMRC to transfer the remaining £3,500 in personal allowance over to your second job. However, you should only ask for this if the income from each job is predictable and consistent. Otherwise you may end up underpaying tax and owe money at the end of the tax year. If you don’t ask for your personal allowance to be split and end up overpaying, you can submit a refund request at the end of the tax year.
In the case that all of your personal allowance is used up in your first job, then everything you earn at your second job will be taxed at the relevant rate. If the combined income from your jobs is below £50,000, that’s a 20% basic rate. When that income surpasses £50,000, then any earnings over £50,000 will be taxed at the higher rate of 40%.
A Self Assessment is a standard tax return form. Anyone who earns additional income that has not already been taxed needs to complete one at the end of every tax year (5th April). The majority of people in the UK receive pay through PAYE employment, where tax and National Insurance contributions are deducted for you. However, people and businesses with other income must report it at the end of every tax year, by submitting a Self Assessment tax return.
Even if you’re not self-employed, if you receive an income other than your PAYE work, you’ll need to complete a tax return each year. For example, if you gain an income through renting out a room in your home or a buy-to-let property, that must be declared, too.
You need to make sure your tax return is submitted before the deadline otherwise you can incur fines. The deadlines vary depending on how you’re submitting it, and also whether it’s your first time filing a tax return. Find out what the current deadlines are for Self Assessments here.
Who Needs to Send a Tax Return?
Even if you earn a bit of extra money from selling secondhand stuff online, but don’t actually consider it officially as part of your income, you may still need to submit a tax return. You must send one if in the last tax year you were:
- Self-employed as a sole trader and earned more than £1,000
- A partner in a business partnership
You will not usually need to send a return if your only income is from you wages or pension. However, you may need to send one if you have any other untaxed income, such as:
- Money from renting out a property
- Tips and commission
- Income from savings, investments, and dividends
- Foreign income
The golden rule is if you’re in any doubt about whether you need to submit a tax return, get in touch with HMRC. It’s much better to know what you need to pay now rather than receiving a surprise tax bill later down the line!
One thing that’s often not clear for the self-employed is that you may not have to declare certain benefits on your tax return.
This is really important to know – especially as record numbers of people receive Universal Credit due to Covid-19. Lots of people made redundant in the pandemic are claiming Universal Credit while they set up their own business. Juggling side hustle taxes, furloughed pay or tax on redundancy packages, and also receiving benefits following your reduced income makes it very confusing. You don’t need to declare Universal Credit income on your self assessment.
Some other benefits may be required for declaration on the tax return – but the return itself will ask if you receive them. Including benefits as part of your income for the year could significantly affect the amount of tax you’re required to pay – so make sure you don’t include your Universal Credit income.
When you’re juggling a side job alongside your PAYE job, it’s easy to think taxes are dealt with in the same tax year as they’re earned. Unfortunately, that’s not the case for the self-employed!
Side hustle taxes could land you with a larger bill than you expected, thanks to Payment on Account. This is where your self-employment tax for the year is calculated… and then HMRC decides that’s what you’re going to earn next year, too. So, you must pay that full year’s tax owed PLUS the following year’s tax. These PoA are split, with 50% due in July and 50% the following January. The aim behind this is to make sure freelancers stay ahead of their tax bills, but it’s a tricky system to navigate – especially as many sole traders have a fluctuating income.
Check out some of these articles next for more help and guidance with your taxes: